More preventive measures needed to curb corporate frauds: Sebi official

Since corporate frauds are inevitable to happen, principle and rule-based regulations are not effective remedy to curb such criminalities but more preventive measures are needed, a senior Sebi official said here on Thursday.

Admitting that all companies, both publicly traded as well as privately held are vulnerable and susceptible to frauds, SK Mohanty, a whole-time member at the Securities and Exchange Board said the regulator is taking multiple measures to curb frauds and strengthening its enforcement mechanism.

Addressing a seminar on corporate frauds organized by the industry lobby CII, he said diversion of funds leads to erosion of wealth for shareholders and also leads to ethical crisis and reputational risk for both regulators as well as regulated entities.

Emphasising that frauds are neutral and can take place in any company irrespective of whether it is listed or not, and more so, in the wake of instances of digital data thefts and technological risks, Mohanty expressed concern over the eroding trust of retail investors, whose presence in the capital markets has seen a massive jump since the pandemic.

Noting that corporate frauds are bound to happen, Mohanty said the rate of corporate frauds is increasing at a higher pace now. To prevent this, he said Sebi has been regularly updating its regulations and strengthening its vigilance and alertness.

Noting that diversion of funds/assets not only leads to erosion of wealth for shareholders, creates anarchy and financial crisis but also leads to ethical crisis and reputational risks, Mohanty underlined the expanded Sebi framework of regulating related-party transactions and the role of risk management committees in the companies.

Principle and rule-based regulations are not a remedy for frauds since corporate frauds are inevitable and to address this issue, preventive measures need to be taken, he concluded.